50 Economics Classics: 23 Things They Don't Tell You About Capitalism

Writing in the wake of the financial crisis, Cambridge University economist Ha-Joon Chang took aim at two notions that had sustained capitalism for the preceding 30 years: that free markets are efficient (people and businesses, left to themselves, will allocate resources in the best way); and that they are just (the more productive you are, the better off you will be).

This outlook had led to privatisation of state-owned companies and utilities, deregulation of finance and industry, trade liberalisation, and lower income taxes and welfare payments.

Although these policies would result in ‘adjustment’ for some parties, overall, we were told, everyone would benefit. In fact, Chang says, the opposite happened. Most rich countries that have adopted these measures have seen increased inequality, slower growth and economic and political instability. In developing countries, the effects have been worse.

Markets aren’t ‘free’ or ‘natural’

There is no such thing as a ‘free’ market. All markets are created and have rules and conditions.

When, in 1819, Britain’s Cotton Factory Regulation Act stopped children age nine and under from working in the factories, there was huge opposition. The legislation, many said, went against freedom of contract and freedom of labour. Now, of course, such protections are taken for granted, part of the landscape of markets.

Chang’s point is that, over time, it is we as citizens who decide what constitutes a ‘free’ market. Markets are full of rules which have become almost invisible over time.

During its industrial rise, from the 1720s to the 1850s, Britain was one of the most protectionist nations of the era. Economic orthodoxy says this was a mistake, and only free market policies could have allowed it to grow.

This is clearly not true, so why should it be so for today’s developing countries? Sub-Saharan Africa had a growth rate of 0.2% between 1980 and 2009, when many countries were subject to neoliberal ‘structural adjustment’ programmes. In the 1960s and 1970s, by contrast, the cumulative growth rate was 1.6% per capita.

The absence of strong private sector companies often requires the government to kick-start industries and provide the money for large capital projects. Yet aid and loans to developing countries, administered by rich nations, are usually given on the condition that such policies are abandoned. It’s a case of ‘do as I say, not as I did’.

The myth of the ‘post-industrial’ age

In our knowledge-based society, so current thinking goes, manufacturing doesn’t matter as much as it did. If they want to do well, developing countries should leapfrog manufacturing and go straight to a service-based economy.

Yet Chang points out that it is difficult to develop a deep service economy without having created a manufacturing one first. With the rare exception of places like the Seychelles which depend on tourism, ‘no country has so far achieved even a decent (not to say high) living standard by relying on services and none will do so in the future’, Chang states.

The free-market view is that governments are incompetent when it comes to sponsoring the development of new industries. In fact, Chang says, governments have often picked winners, sometimes in spectacular fashion. True, there have been many ‘white elephants’, but there have been plenty of other projects that achieved their purpose of building a national industrial economy.

Governments fund directly or indirectly 20-50% of R&D in rich countries, and though free marketeers hate to admit it, most of the areas where the US has a technological lead have been assisted by generous state R&D and military funding.

Regulation works, Chang says, not because the government pretends it knows more, but because it reduces the ‘unknown unknowns’ – catastrophic economic events which arise from individuals or firms pursuing their self-interest without being aware of the consequences.

Stiff regulation or banning of financial instruments might seem extreme, Chang says, but isn’t this what governments do all the time with drugs, car safety, aviation safety and electrical products? The short-term profit-seeking of today’s financial system is at odds with the patient investment in firms and infrastructure that countries actually need if they are to prosper.

Final comments

Chang claims his book is not an ‘anti-capitalist manifesto’. He is a believer in the power of the profit motive and sees markets as an ‘exceptionally effective’ machine in achieving social and economic goals.

Yet ideological free-market capitalism is just one form of capitalism, and the evidence from the past 30 years is that it hinders growth, increases inequality and produces more frequent financial crashes.

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